Homeowners in Cyprus who have purchased a new property using the reduced 5% VAT rate are legally required to notify tax authorities and repay a portion of the tax benefit if they decide to sell or rent out the home before a mandatory 10-year period has passed. Failure to comply can result in significant financial penalties and legal complications.
The Reduced VAT Scheme Explained
While the standard Value Added Tax (VAT) rate on new properties in Cyprus is 19%, the government offers a reduced rate of 5% to first-time buyers to make homeownership more accessible. This tax incentive applies only to the purchase of new, not resale, properties and is subject to strict conditions.
Under the current rules, updated in June 2023, the reduced rate applies to:
- The first 130 square meters of a new property, provided the total buildable area doesn’t exceed 190 sq. m.
- A property value of up to €350,000, with a total transaction value not exceeding €450,000.
The 10-Year Occupancy Rule and Repayment Process
A key condition for receiving the tax break is that the owner must use the property as their primary and permanent residence for at least 10 years.
If an owner breaks this condition by selling or renting the property earlier, they must officially inform the VAT Department through the Tax For All (TFA) portal. The authorities will then calculate the amount of VAT that needs to be repaid. This amount is calculated on a pro-rata basis, meaning the owner only pays back the portion of the tax benefit corresponding to the remaining years of the 10-year term. For example, if a person sells after 7 years, they must repay the VAT benefit for the remaining 3 years.
Consequences of Non-Compliance
Authorities warn that failing to notify the VAT Department in a timely manner can lead to several negative consequences, including:
- Penalties and interest charges on the amount owed.
- Significant delays in the completion of the sale transaction.
- Potential legal exposure.
It’s important to note that once the outstanding VAT is settled, an individual can re-apply for the 5% reduced rate on a future property purchase, provided they meet the eligibility criteria again.
Source: Cyprus Property News